The Department of the Treasury and the IRS released Notice 2025-69 on November 21, 2025, providing guidance to individuals on how to calculate and claim the new qualified overtime and qualified tip deductions for tax year 2025. These deductions were created under H.R. 1, The One Big Beautiful Bill Act, enacted on July 4, 2025.
The Act introduced two new income tax deductions for qualified tips and qualified overtime pay.
Transition Guidance for Individuals in 2025
Because the deductions apply retroactively to January 1, 2025, the Act included transition rules to give employers and payroll providers time to update their systems. Earlier this month, Notice 2025-62 offered penalty relief to employers and payors for certain information reporting failures related to tips and overtime. Employers were encouraged, though not required, to provide supplemental statements showing cash tips, qualified overtime, and occupation codes, Notice 2025-69 explains how individuals can use whatever information they do receive when calculating their own 2025 deductions.
Determining Qualified Tips
Calculating 2025 Qualified Tips
The Notice outlines several ways individuals can determine their qualified tip amount. Taxpayers may rely on:
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Form W-2, Box 7 tip amounts
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Monthly tip reports, such as Form 4070
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Voluntary employer-provided cash tip information
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Additional unreported tips included on Form 4137
Employers may also use Form W-2, Box 14, to report tip information separately, an option newly recognized in this Notice.
Independent contractors may calculate qualified tips using earnings statements, POS reports, daily logs, third-party settlement records, or similar documentation.
The deduction is only available for tips received while working in an occupation that customarily and regularly received tips on or before December 31, 2024. Beginning in 2026, employers must report a Treasury tipped occupation code (TTOC), but for 2025, individuals must confirm that their occupation qualifies.
SSTB Transition Relief
The Act excludes tips earned in a specified service trade or business (SSTB) from the deduction. Treasury and IRS will issue regulations to help taxpayers determine whether a business is an SSTB. Until final regulations take effect, the IRS will treat tips as not from an SSTB if received in an occupation that regularly received tips as of December 31, 2024.
Determining Qualified Overtime
The Notice also explains how individuals should determine their qualified overtime compensation. The deduction is capped at $12,500 for single filers ($25,000 for joint filers) and phases out for taxpayers with modified AGI above $150,000 ($300,000 for joint filers).
The first step is determining whether the individual is covered by the Fair Labor Standards Act (FLSA). Workers who are FLSA-exempt—such as many salaried, administrative, professional, outside sales, or highly compensated employees—are generally not eligible for the deduction.
Because employers are not required to provide separate overtime breakdowns in 2025, individuals must make a reasonable effort to determine their qualified overtime. Notice 2025-69 provides several reasonable methods depending on how overtime is paid and what documentation is available, including:
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Using employer-reported overtime amounts
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Using one-third of the reported overtime if no premium portion is separately identified
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Using fractional approximations for overtime rates above 1.5x
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Adjusting calculations when bonuses increase overtime pay
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Estimating based on the regular rate and hours worked if no year-end statements are provided
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Applying special overtime rules for certain public-sector and healthcare workers
Individuals must keep copies of any records used in calculating the deduction.
Additional Guidance Expected
Treasury and the IRS plan further guidance in several areas, including:
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Final 2026 forms (W-2, 1099-K, 1099-MISC, 1099-NEC, and W-4)
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Administration rules for the 2026–2028 tax years, when the deductions remain in effect
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Final regulations on tipped occupations and qualified tips, following proposed rules issued in September 2025
Companies should monitor forthcoming regulations, as they may update the list of qualifying occupations, TTOCs, and other tip-related requirements.
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